bus ecn- profitmax ch11.ppt
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Transcript of bus ecn- profitmax ch11.ppt
8/14/2019 bus ecn- profitmax ch11.ppt
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Profit Maximisation under
Perfect Competition
and Monopoly
8/14/2019 bus ecn- profitmax ch11.ppt
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Alternative Market Structures
•
Classifying markets (by degree ofcompetition)
– number of firms
– freedom of entry to industry
• free, restricted or blocked?
– nature of product
• homogeneous or differentiated?
– nature of demand curve
• degree of control the firm has over price
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Alternative Market Structures
•
The four market structures – perfect competition
– monopoly
– monopolistic competition
– oligopoly
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Features of the four market structures
Type of market
Number of firms
Freedom of entry
Nature of product
Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
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Features of the four market structures
Type of market
Number of firms
Freedom of entry
Nature of product
Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
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Features of the four market structures
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
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Features of the four market structures
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
http://slidepdf.com/reader/full/bus-ecn-profitmax-ch11ppt 8/45
Features of the four market structures
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
http://slidepdf.com/reader/full/bus-ecn-profitmax-ch11ppt 9/45
Features of the four market structures
Type of market Number of firms Freedom of entry Nature of product Examples Implications for demand curve
faced by firm
Perfect
competition
Very
many UnrestrictedHomogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic competition
Many /several
Unrestricted Differentiated Builders,restaurants
Downward sloping,but relatively elastic
Oligopoly Few Restricted
Undifferentiated
or differentiated
Cement
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Monopoly One Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
8/14/2019 bus ecn- profitmax ch11.ppt
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Alternative Market Structures
•
The four market structures – perfect competition
– monopoly
– monopolistic competition
– oligopoly
• Structure conduct performance
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Perfect Competition
•
Assumptions – firms are price takers
– freedom of entry of firms to industry
– identical products
– perfect knowledge
•
Distinction between short and long run – normal profits
– supernormal profits
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Perfect Competition
•
Short-run equilibrium of the firm – Price
• given by market demand and supply
– Output
• where P = MC
– Profit
• (AR – AC ) × Q
• possible supernormal profits
8/14/2019 bus ecn- profitmax ch11.ppt
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O
£
(b) Firm
Q (thousands)
O
(a) Industry
P
Q (millions)
S
D
P e
MC
AR D = AR= MR
Qe
AC
AC
Short-run equilibrium of industry and firm under perfect
competition
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Qe
P 1D1 = AR 1
= MR 1 AR 1
O O
(a) Industry
P £
Q (millions)
S
D
(b) Firm
MC AC
AC
Q (thousands)
Loss minimising under perfect competition
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D2
Short-run shut-down point
O O
(a) Industry
P £
P 2
Q (millions)
S
(b) Firm
AR 2
D2 = AR 2
= MR 2
MC AC
AVC
Q (thousands)
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Perfect Competition
• Short-run equilibrium of the firm (cont.)
– short-run supply curve of firm
• the MC curve
• Short-run supply curve of industry
– sum of supply curves of firms
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Perfect Competition
•
The long run – long-run equilibrium of the firm
• all supernormal profits competed away
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O O
P £
Q (millions)
S1
D
LRAC
P L
P 1
QL
Se
AR 1 D1
AR L DL
Q (thousands)
Long-run equilibrium under perfect competition
New firms enterSupernormal profitsProfits return
to normal
(a) Industry (b) Firm
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Perfect Competition
•
The long run – long-run equilibrium of the firm
• all supernormal profits competed away
• LRAC = AC = MC = MR = AR
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£
QO
(SR)AC
(SR)MC
LRAC
AR = MR
DL
LRAC = (SR)AC = (SR)MC = MR = AR
Long-run equilibrium of the firm under perfect competition
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Perfect Competition
• The long run
– long-run equilibrium of the firm
• all supernormal profits competed away
•LRAC = AC = MC = MR = AR
– long-run industry supply curve
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Perfect Competition
• The long run
– long-run equilibrium of the firm
• all supernormal profits competed away
•LRAC = AC = MC = MR = AR
– long-run industry supply curve
– incompatibility of economies of scale with
perfect competition
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Perfect Competition
• The long run
– long-run equilibrium of the firm
• all supernormal profits competed away
•LRAC = AC = MC = MR = AR
– long-run industry supply curve
– incompatibility of economies of scale with
perfect competition
• Does the firm benefit from operatingunder perfect competition?
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Monopoly
• Defining monopoly
– importance of market power
– concentration ratios
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Concentration ratios in the UK
Industry 5-firm ratio Industry 5-firm ratio
Chilled Indian ready meals 89.3 Bottled water (still) 58.0
Frozen Indian ready meals 75.0 Bottled water (sparkling) 35.0
Record companies 73.9 Frozen foods 34.4
Batteries 70.9
Skin care products 64.4 3-firm ratio
Jeans retail 39.0 Chocolate manufactures 76.0
Book publishing 37.6 Breakfast cereals 69.0
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Monopoly
•
Barriers to entry – economies of scale
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors or outlets
–
legal protection – mergers and takeovers
– aggressive tactics
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Monopoly
• The monopolist's demand curve
– downward sloping
– MR below AR
AR d MR f l
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-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
AR and MR curves for a monopoly
Q
(units)
1
23
4
5
6
7
P =AR
(£)
8
76
5
4
3
2
AR A R , M
R ( £ )
Quantity
AR and MR curves for a monopoly
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-4
-2
0
2
4
6
8
1 2 3 4 5 6 7
Q
(units)
1
23
4
5
6
7
P =AR
(£)
8
76
5
4
3
2
TR
(£)
8
1418
20
20
18
14
MR
(£)
64
2
0
-2
-4
MR
A R , M
R ( £ )
Quantity
AR
AR and MR curves for a monopoly
M l
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Monopoly
•
Equilibrium price and output – MC = MR
Profit maximising under monopoly
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Profit maximising under monopoly
MR
£
QO
MC
Qm
M l
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Monopoly
•
Equilibrium price and output – MC = MR
– measuring level of supernormal profit
Profit maximising under monopoly
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Profit maximising under monopoly
MR
£
QO
MC
Qm
Profit maximising under monopoly
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£
QO
MC
AC
Qm
MR
AR
AC
AR
Profit maximising under monopoly
Profit maximising under monopoly
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£
QO
MC
AC
Qm
MR
AR
AC
AR
Total profit
Profit maximising under monopoly
M l
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Monopoly
•
Equilibrium price and output – MC = MR
– measuring level of supernormal profit
• Monopoly versus perfect competition
M l
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Monopoly
•
Equilibrium price and output – MC = MR
– measuring level of supernormal profit
• Monopoly versus perfect competition
– lower output at a higher price
Equilibrium of industry under perfect competition and
8/14/2019 bus ecn- profitmax ch11.ppt
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AR = D
MC
MR
£
QO Q1
P 1
Monopoly
Equilibrium of industry under perfect competition and
monopoly: with the same MC curve
Equilibrium of industry under perfect competition and
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£
QO
MC ( = supply under
perfect competition)
Q1
MR
P 1
P 2
Q2
AR = D
Comparison withPerfect competition
Equilibrium of industry under perfect competition and
monopoly: with the same MC curve
Monopoly
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Monopoly
•
Equilibrium price and output – MC = MR
– measuring level of supernormal profit
• Monopoly versus perfect competition
– lower output at a higher price
•
short run and long run
Monopoly
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Monopoly
• Equilibrium price and output
– MC = MR
– measuring level of supernormal profit
• Monopoly versus perfect competition
– lower output at a higher price
•
short run and long run
– costs under monopoly
Equilibrium of industry under perfect competition and
8/14/2019 bus ecn- profitmax ch11.ppt
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£
QO Q1
MR
P 1
MC monopoly
AR = D
Equilibrium of industry under perfect competition and
monopoly: with different MC curves
Equilibrium of industry under perfect competition and
8/14/2019 bus ecn- profitmax ch11.ppt
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£
QO
MC ( = supply)perfect competition
Q1
MR
P 1
P 2
Q2
MC monopoly
AR = D
x
Q3
P 3
Equilibrium of industry under perfect competition and
monopoly: with different MC curves
Monopoly
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Monopoly
• Equilibrium price and output
– MC = MR
– measuring level of supernormal profit
• Monopoly versus perfect competition
– lower output at a higher price
•
short run and long run
– costs under monopoly
– innovation and new products
Contestable Markets
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Contestable Markets
• Importance of potential competition
– low entry costs
– low exit costs
• Perfectly contestable markets
• Contestable markets & naturalmonopolies
• The importance of costless exit
– absence of sunk costs
– hit-and-run competition
• Assessment of the theory